Have you filed your taxes yet? If not, here are a few kernels of wisdom from The Motley Fool's retirement expert.
Tax season can be a stressful time for many Americans. There are documents to round up, forms to fill out, decisions to make about deductions, and more. With the April filing deadline getting closer, I asked longtime Fool Robert Brokamp for a few insights that might be helpful to investors like you. Robert is the advisor for Rule Your Retirement, a retirement-planning newsletter from our sister publishing company. He also stars on the Motley Fool Answers podcast, which can be found in the App Store on iTunes.
On Reducing Stress
Matt Trogdon: Thanks for doing this, Bro. Here’s my first question. What tips do you have for taxpayers that can help reduce the stress of the season? Are there any apps or websites that you find particularly helpful for folks as they move throughout the process?
Robert Brokamp: One of the biggest sources of frustration at tax time is finding all the information you need. One solution is to collect it all as it comes in. Put a big manila folder close to where you sort your mail, to collect any documents delivered via the Postal Service. In your email inbox, create a separate folder for all tax-related info delivered electronically. Also consider setting aside year-end financial statements, which often contain helpful tax information, such as the amount of interest paid or received over the course of the year.
Also, don’t wait until the last minute. Aim to have your taxes done before March 15. That way, you won’t have a panic attack if you find out you’re missing paperwork. You’re also more likely to find professional help if you decide it’s necessary; you may have trouble finding a good tax-prep pro with spare time in April. Plus, if you’re due a refund, you’ll get the money back sooner. If it turns out you owe money, you can wait until the deadline to file your taxes. But that gives you some extra time to come up with the money.
Note that you have a few extra days to get your taxes done this year. Because April 15 falls on a Saturday and April 17 is Emancipation Day, a legal holiday in Washington, D.C., the deadline to file your federal return is Tuesday, April 18.
On When To Consult A Professional
Trogdon: One decision that I’m currently facing is whether to use a program like TurboTax or to go to a tax professional. I know there’s no hard and fast rule, but are there any guidelines you might use for someone who’s deciding whether to file his or her own taxes or to get professional help?
Brokamp: The more complicated your tax situation, the more you might benefit from getting professional help. Owning a business; owning a lot of company stock; owning investment real estate, particularly in different states; or experiencing a big life transition – for example, getting married, retiring, or moving to a new location and starting a new job – are some factors that could warrant hiring a Certified Public Accountant (CPA) or Enrolled Agent (EA) who specializes in helping taxpayers in your situation.
On the other hand, if your tax situation is pretty simple – if most or all of your income is from a paycheck and you don’t take many deductions – then using tax-prep software can be easy and cost-effective.
On Reducing Your Tax Bill(s)
Trogdon: Are there still ways for taxpayers to reduce their tax bills for 2017? If not, are there any lesser-known ways that they can start planning now to reduce their tax bill for 2018?
Brokamp: The only significant option still available is making a 2016 contribution to an IRA. That would lead to immediate tax savings if you make a deductible contribution to a traditional IRA. If you’re not able to deduct the contribution, then consider a Roth IRA, as long as you’re eligible. That won’t give you a break on your tax return, but the money will grow tax-free as long as you follow the rules. If you decide to make a contribution to an IRA of any variety, make it clear that it’s for 2016 and not this year. (For details about traditional IRA deductibility and Roth IRA eligibility, visit https://www.irs.gov/retirement-plans/ira-deduction-limits.)
As for your 2017 taxes – that is, the return you’ll be filing in 2018 – a lot hinges on possible changes to the tax code courtesy of the Trump administration. Given that the Republicans control Congress, there’s a better than 50-50 chance that something will be different; however, we don’t yet know what, or when. So pay attention to how things unfold, and if new laws result in your paying a lower tax rate, consider accelerating income to this year or converting some traditional IRA assets to Roth assets.
On Investment Planning
Trogdon: I’ve known you for a long time, so I know you’re a big proponent of proper “asset location.” How can that help out when tax time comes?
Brokamp: Asset location is all about maximizing your after-tax return by putting highly taxed investments in IRAs and 401(k)s, and using taxable brokerage accounts for investments with built-in tax advantages. For example, you might hold a high-turnover, high-yield mutual fund in an IRA, while using your taxable account for a stock that doesn’t pay a dividend and that you plan to hold for many years. If, when you do your taxes over the next several weeks, you spend a lot of time accounting for investment income, that might be a sign that there’s opportunity to improve your asset location.
This tax information is provided for general education purposes and is not intended to be used as individual advice. Motley Fool Asset Management is not a tax advisor. For information or advice on your personal tax situation, please consult a tax advisor.